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2014 (12) TMI 893 - AT - Income TaxTransfer pricing adjustment Determination of ALP on international transaction software development and system integration services rendered to Bearing Point Group and its worldwide customers Selection of comparable - Avani Cincom Technologies Ltd. - KALS Information Systems Ltd. - Held that - It was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables - Non-furnishing the information obtained u/s 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable - this company was not selected on the basis on any search process carried out by the TPO but only on the basis of information collected under section 133(6) - the finding excluding it from the list of comparables rendered in the immediately preceding year is applicable in this year also Following the decision in Trilogy E-Business Software India (P.) Ltd. Versus Deputy Commissioner of Income-tax. Circle 12(4). Bangalore 2013 (1) TMI 672 - ITAT BANGALORE - since the functional profile and other parameters by this company have not undergone any change during the year under consideration which fact has been demonstrated by the assessee the AO/TPO is directed to omit this company from the list of comparables. Celestial Biolabs Ltd. Held that - The assessee has brought on record substantial factual evidence to establish that this company is functionally dis-similar and different from the assessee Following the decision in Trilogy E-Business Software India (P.) Ltd. Versus Deputy Commissioner of Income-tax. Circle 12(4). Bangalore 2013 (1) TMI 672 - ITAT BANGALORE - the functional profile of and other parameters of this company have not changed in this year under consideration which fact has also been demonstrated by the assessee - this company ought to be omitted from the list of comparables. Lucid Software Ltd. Functionally different unit - Held that - Lucid Software Ltd. is engaged in the development of software products whereas the assessee is in the business of providing software development services in Transwitch India (P.) Ltd. Versus Deputy Commissioner of Income-tax Circle 16 New Delhi 2012 (5) TMI 314 - ITAT DELHI it has been held that since this company is engaged in the software product development and not software development services it is functionally different and dis-similar and is therefore to be omitted from the list of comparables for software development service providers thus the Company should be excluded from the list of comparable companies. Thirdware Solutions Ltd. (Segment) Held that - The company is engaged in product development and earns revenue from sale of licenses and subscription - the segmental profit and loss accounts for software development services and product development are not given separately - the assessee is rendering software development services following the decision in M/s. 3DPLM Software Solutions Ltd. (Successor to Delmia Solutions Private Ltd.) Versus Dy. Commissioner of Income Tax 2014 (12) TMI 612 - ITAT BANGALORE - the AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. Persistent Systems Ltd. Held that - The company i.e. Persistent Systems Ltd. is engaged in product development and product design services while the assessee is a software development services provider - in the absence of segmental details / information a company cannot be taken into account for comparability analysis this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration - the AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. Quintegra Solutions Ltd. Held that - Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assessee - this company is also engaged in proprietary software products and has substantial R 1, 26, 19, 649/- incurred on telecommunication charges insurance expenses and travelling expenses from export turnover and total turnover Decided in favour of assessee. Prior period expenses disallowed Held that - The expenditure was wholly and exclusively for the purpose of business and that the same was genuine the fact that the expenditure relates to an earlier period cannot be a ground to deny the deduction especially when factually crystallization of liability during the previous year has not been disputed - the expenses claimed by the assessee is to be allowed Decided in favour of assessee.
Issues Involved:
1. Addition to total income by way of adjustment to the Arm's Length Price (ALP) for an international transaction. 2. Exclusion of certain expenses from export turnover while computing deduction under section 10A. 3. Disallowance of prior period expenses. 4. Levy of interest under sections 234B and 234C. Issue-wise Detailed Analysis: 1. Addition to Total Income by Way of Adjustment to the Arm's Length Price (ALP) for an International Transaction: The assessee, a company providing software development and system integration services, engaged in an international transaction with its Associated Enterprise (AE). The assessee adopted the Transactional Net Margin Method (TNMM) to determine the ALP, arriving at an operating profit/cost percentage of 12.13%. The Transfer Pricing Officer (TPO) selected 20 comparables, resulting in an arithmetic mean PLI of 25.35% after working capital adjustment. This led to a transfer pricing adjustment of Rs. 6,44,76,173. The assessee contested the inclusion of certain comparables, citing functional dissimilarities. The Tribunal, referencing prior decisions, excluded the following companies from the list of comparables due to functional differences: - Avani Cincom Technologies - Celestial Biolabs Ltd. - KALS Information Systems Ltd. - Lucid Software Ltd. - Thirdware Solutions Ltd. - Persistent Systems Ltd. - Quintegra Solutions Ltd. - Softsol India Ltd. - Tata Elxsi Ltd. - Infosys Technologies Ltd. - Wipro Ltd. The Tribunal directed the AO to recompute the arithmetic mean by excluding these companies and to reconsider the working capital adjustment in light of the assessee's submissions. 2. Exclusion of Certain Expenses from Export Turnover While Computing Deduction Under Section 10A: The assessee challenged the exclusion of Rs. 1,26,19,649 incurred on telecommunication charges, insurance expenses, and traveling expenses from export turnover. The Tribunal, referencing the Karnataka High Court decision in CIT v. Tata Elxsi Ltd., directed the AO to exclude these expenses from both export turnover and total turnover. 3. Disallowance of Prior Period Expenses: The AO disallowed Rs. 4,74,991 as prior period expenses. The assessee argued that these were short provisions from earlier years, recognized during the current year. The Tribunal, noting the genuineness and business nature of the expenses, directed the AO to allow the deduction, referencing decisions in National Aluminum Co. Ltd. v. DCIT and Goetz India Ltd. v. DCIT. 4. Levy of Interest Under Sections 234B and 234C: The grounds regarding the levy of interest under sections 234B and 234C were deemed consequential. The AO was directed to provide consequential relief. Conclusion: The Tribunal partly allowed the appeal, directing the AO to recompute the ALP by excluding certain comparables, reconsider the working capital adjustment, exclude specific expenses from both export and total turnover for section 10A deduction, and allow the prior period expenses as genuine business expenses. The issues regarding interest under sections 234B and 234C were to be addressed consequentially.
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